What Exactly Is a PLLC?

PLLC stands for Professional Limited Liability Company. A PLLC is a limited liability company that is formed for the purpose of providing professional services. Practitioners in many professions can form a PLLC, for example, accountants, architects, engineers, health care professionals, lawyers and medical professionals.
Unlike traditional limited liability companies, PLLCs are regulated by the State. The states follow the concept of "professional malpractice" as oppose to "ordinary liability" to determine whether a facility should be formed as a PLLC. A PLLC must have all the members licensed in the same profession. In many states , if practitioners in several related fields want to practice together, they form a PLLC that contains those practitioners. For example, an architect can form a PLLC with an engineer and an environmental planning firm. However, professionals that are only tangentially related, cannot form a PLLC. For example, a lawyer cannot form a PLLC with an architect because those professions are not closely or inherently related – a lawyer does not rely on an architect for the lawyer to practice law.

The Value of a PLLC Operating Agreement

Just because an operating agreement for a PLLC is not always legally required, doesn’t mean you should skip establishing an operating agreement. An operating agreement outlines the groundwork of how your company will be run. Even in situations when you are the only owner of the PLLC, it’s important to have the details of the company’s administration documented. Having a PLLC operating agreement can also help you avoid the pitfalls of liability issues.
A PLLC operating agreement can be thought of like the constitution of your business or LLC as a whole, and it defines in detail how the owners (also known as members) plan on running the company. It gives the members concrete rules that govern how the company will be managed.
Generally, the operating agreement includes things like: Having a PLLC operating agreement can help prevent various management conflicts and disagreements. Having rules in place is especially important if there are multiple members, as the company will be much easier to administer according to the rules already agreed upon by the members. If you have an operating agreement in place, then the only way to make changes to those rules is to do so according to what’s stipulated in the agreement itself. For example, the agreement might say that any changes to the rules can only be made with approval from each of the members holding majority of the company shares.

Key Components of a PLLC Operating Agreement

When forming a professional limited liability company (PLLC), the operating agreement is a crucial document that lays out the framework for how the business will operate and sets the tone for member relationships. While states place an emphasis on the flexible design of the agreements, a solid PLLC operating agreement typically includes several key components—such as membership details, capital contributions, profit distribution, decision-making processes, and procedures for resolving disputes among members—that make up the essential elements of a PLLC operating agreement. Members. It is important, when drafting a PLLC operating agreement, to clearly identify all parties involved, detailing the roles and responsibilities for each member of the company, and making it clear whether any other positions exist—such as managers or officers—and what powers those positions carry. An operating agreement should also establish terms for transfers of membership interests through the sale of membership shares, and if and how members may add new members or remove existing ones in the future. Capital Contributions. PLLC operating agreements also typically state the amount of capital that each member will contribute to the company to establish the company’s initial funding sources. These contributions may be cash, services, or intellectual property, for example, and should include information that identifies any specific requirements beyond simply meeting the capital contributions in the initial phases of the business operations. Profit Distribution. Generally, operating agreements for PLLCs will specify how profits and losses are to be distributed among the members of the company, often on an equal basis, or in accordance with the percentage of the member’s initial contributions to the business. Decision-Making Process. The best PLLC operating agreements spell out the decision-making process for the company, identifying what sorts of decisions require member approval or a vote amongst members, and which decisions may be made unilaterally by any one person (generally reserved for certain management types) or require the consent of some set percentage of members. Dispute Resolution. Having clear protocols in a PLLC operating agreement for how the company will handle any disputes among members can help avoid disagreements from damaging the business. Commonly-used methods include informal mediation and arbitration, but the best PLLC operating agreements identify a specific process for resolution to provide a framework for settling issues. These five standards are frequently found in the best PLLC operating agreements, but not every agreement requires every feature. A well-drafted PLLC operating agreement is critical to the future of a new business.

How to Prepare a Comprehensive PLLC Operating Agreement

A well-drafted PLLC Operating Agreement is essential for the smooth operation of the office. The Operating Agreement is, for all practical purposes, the "law in the law firm." It sets forth the rules of the road and the parameters with which the operation of the firm must stay within. Without the regime that the PLLC Operating Agreement creates, there is no guarantee that things will get done in a manner as the owners of the PLLC had intended. Stated another way, without an Operating Agreement that all PLLC members have in front of them, the game will be played as each individual member wants to play the game and we all know how difficult it is to get people to agree with each other.
In drafting a PLLC Operating Agreement, there are a number of things to consider to ensure that the agreement meets the needs of both the PLLC and its members:

• (1) choice of law;
• (2) provisions on admission of members;
• (3) member started phase out;
• (4) restrictions (e.g., practice restrictions);
• (5) management structure of the firm and allocations to the members;
• (6) distributions to the members; and
• (7) voting rights of the members.

There are other things to consider as well in a PLLC Operating Agreement such as ownership by non-lawyers, what happens during death or incapacity, allocation (and taxation) of income, depreciation, capital expenditures, distributions, and reserves.

Typical Mistakes to Avoid

Nevertheless, with that said, many business owners still make mistakes when preparing a PLLC Operating Agreement. The following is a list of five of the more common errors:

• However, while it is important to include such provisions in the operating agreement, at the same time, the members should not be too specific regarding the actual percentage of distributions to be made and the schedule of such distributions. Instead, the governing agreement should contain a general provision stating that distributions will be made only when feasible based upon the business’ income and expenses, as well as its capital needs.
• Similarly, while the members should have a general understanding as to the amount of draw they will receive, the specific amount to be received should not be set forth in the governing document. Circumstances affecting the business may change over time and the members need the flexibility to adapt accordingly. Accordingly , the members should instead retain the right to increase or decrease the "draw" at their discretion.
• The initial capital contributions to be made by the various members should be clearly stated in the governing document, and the amount of such contributions should be set as being due and payable in full no later than 30 days from the date on which the PLLC is formed.
• Upon a member’s death, that person’s interest in the PLLC (and any distributions the member was entitled to upon their death) passes to that individual’s estate. Accordingly, such ownership interest and the right to receive distributions continues for the benefit of the estate, which should also be able to manage, improve, and protect that interest.
• Without a provision to the contrary, a member’s interest in the PLLC is freely assignable. Accordingly, the governing document should specifically state that no member can assign his/her/its interest in the PLLC without the prior written consent of the remaining members.

Making Changes to Your Agreement

It’s not uncommon for PLLCs to draft an operating agreement when the business is first formed but then never revisit the document until a significant change occurs, such as a new member joining the company. Even if amendments are made during the life of a PLLC, it’s important to periodically review and amend the operating agreement. PLCC members may want to do so to reflect changing membership; reinvestment of profits; capital contributions; distributions in the case of a defective member withdrawal; or project-based work or fees.
Amending an operating agreement typically can be accomplished in one of two ways, depending on how the agreement was originally written.

1. Written consent method. Adopting this procedure is an option when the terms of the operating agreement don’t specifically discuss how to amend it. All members of an PLLC must consent to the proposed amendments in writing for the amendments to be considered valid. Amendments should specifically indicate what portions of the operating agreement are being removed (if any) and/or what portions are being added or changed.
2. Unanimous consent method. The amendment procedure in your PLLC operating agreement may state that all members have to consent in writing, usually by a specific date. Upon receiving such consent by each member, the amended document becomes effective immediately unless otherwise specified.

Policies and procedures for amending an operating agreement can also be included in the PLLC’s bylaws.

State Requirements and Legal Issues

Legal Factors and State Requirements for PLLC Operating Agreements
In addition to the basic components, the remaining provisions are highly dependent upon applicable law. This is no surprise, as the term "limited liability company" involves limited liability – in other words, protection from personal liability regarding the debts of the business entity. But as with many protections offered by the law, that protection isn’t absolute. Consider the following legal factors for a PLLC operating agreement:
When dealing with professional services, other legal factors may come into play. For instance, you may have concerns involving malpractice or disciplinary issues . In such cases, it is advisable to consult with the appropriate professional organization to determine whether an operating agreement for a professional service limited liability company ("PLLC") would be sighted by the organization’s standards and what regulations must be complied with.
Further, if you plan to form a PLLC, ensure that you understand the professional services being offered, as well as the governing state laws. Some states have specific requirements for PLLCs. For example, Arkansas law requires that all practicing members of a PLLC be licensed to practice the same professional service. In North Carolina, on the other hand, the law does not require all members to be licensed to practice the same professional service, although the services offered by the PLLC must be permitted by law to be offered by a PLLC.